What Is a Private Transfer Fee in Real Estate?

A private transfer fee is a contractual obligation requiring a payment to a third party each time a property is sold. This fee differs from standard closing costs, such as transfer taxes or recurring homeowner association (HOA) fees. It typically arises from a prior agreement, creating an ongoing financial commitment for future owners.

What is a Private Transfer Fee?

A private transfer fee is a contractual charge imposed on a property, requiring payment to a third party upon each subsequent sale. This third party is a private company, developer, or sometimes a homeowners’ association or charitable organization, not the seller or a government entity. Developers typically establish these fees during the initial sale, often embedding them within the property deed or recording them as covenants, conditions, and restrictions (CC&Rs).

This contractual obligation “runs with the land,” binding future owners. Developers or private entities typically create these fees to generate a continuous revenue stream, sometimes to recover costs for infrastructure development or fund specific projects. Unlike a government transfer tax or a recurring HOA fee for community maintenance, a private transfer fee is a specific charge payable to a private entity upon ownership transfer.

How Private Transfer Fees Operate

Private transfer fees are established through legal instruments recorded in the public land records of the county where the property is located. These instruments, often titled “Declaration of Covenant,” create an encumbrance on the property. They stipulate that a fee must be paid to a designated entity each time the property changes ownership.

The duration of these fees varies, often specified for 20 to 99 years, or even in perpetuity. The amount is typically a percentage of the sales price, commonly 0.5% to 2%, or a fixed amount. For instance, a $400,000 property with a 1% fee would incur a $4,000 charge.

At the time of sale, the private transfer fee is usually collected during closing, often through escrow or by the closing agent. It typically appears as a line-item charge on the seller’s closing statement, with funds disbursed directly to the fee holder. These fees should appear on the title commitment or abstract of title.

Legal Status and Enforceability

The legal landscape surrounding private transfer fees has led to widespread restrictions and prohibitions. Many state legislatures have enacted laws to limit or ban them due to concerns about property marketability and consumer awareness. As of 2023, many states explicitly prohibit private transfer fees in most situations.

These state-level actions often deem certain private transfer fee obligations unenforceable. Some regulations require clear disclosure, while others limit their duration or exempt certain types, such as those benefiting the property or paid to homeowners’ associations for community services. The Federal Housing Finance Agency (FHFA) also issued a rule in 2012 prohibiting them on mortgages handled by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Such prohibitions aim to prevent fees that do not directly benefit the burdened property or its owners, particularly those designed solely to generate revenue for a third party with no ongoing interest in the property. For a fee to be enforceable where restricted, it often must meet specific criteria: clear disclosure, reasonable duration, and demonstrable property benefit. When a fee is deemed unenforceable, it means that the obligation to pay it cannot be legally upheld against the property owner.

Implications for Real Estate Transactions

Private transfer fees can introduce unexpected financial burdens and complexities for both buyers and sellers. For buyers, the fee means an additional cost at purchase, increasing closing expenses. It also represents an ongoing financial obligation incurred each time the property is subsequently sold, affecting long-term ownership costs. Buyers may find properties with these fees less appealing due to the added expense.

For sellers, a private transfer fee can impact the property’s marketability and perceived value. The obligation to pay a portion of the sale price to a third party reduces net proceeds. Potential buyers might be deterred by the fee, or they may negotiate a lower purchase price to offset the future financial obligation.

Clear disclosure of private transfer fees is important, but they can sometimes be overlooked until late in the closing process. This can complicate or delay the closing if the parties are surprised by the fee and need to negotiate its payment or determine its enforceability. Buyers should consult with real estate professionals, such as agents and attorneys, to review all property documents and understand any identified fees before finalizing a purchase.